What if I Cannot Pay the IRS?

When slapped with a staggering tax bill, very few people have the luxury of being able to pay the amount due in full. If that is you and you have exhausted all other repayment options, you might consider opting for Currently Non-Collectible Status (CNC). While this option is not for everybody, it can stall the collection process until you can come up with a solution to pay what you owe. We understand the frustration and embarrassment of being in this position and we can help. Keep reading to learn if you are eligible and if you have questions, feel free to give us a call.

IRS Currently Not Collectible)[1] is defined as the decision the IRS takes in concluding that a taxpayer has no ability to pay their annual federal income taxes. This type of status protects taxpayers from the “aggressive tactics of the IRS Collection Division” (Avvo.com, “Currently Not Collectible Status,” 8/18/2013).

The IRS CNC status is useful for taxpayers wishing to negotiate regarding their responsibility to pay off owed taxes. “Negotiating Currently Not Collectible status indicates to the IRS that you are serious about your responsibility to pay off taxes you may owe but do not have the funds to pay at this time” (Hein).

The IRS can declare a taxpayer in “IRS Currently Not Collectible” after receiving evidence of the taxpayer’s inability to pay. This type of evidence is typically obtained from the taxpayer on IRS Form 433-F, Collection Information Statement. A taxpayer can request to be considered Currently Not Collectible by submitting the form to an IRS Revenue Officer or through the IRS Automated Collection System unit.

WHAT HAPPENS WHEN A TAXPAYER IS DECLARED IRS CURRENTLY NOT COLLECTIBLE?

Once a taxpayer is declared IRS CNC, the IRS stops all collection activities, which include issuing levy and garnishment orders. The IRS sends an annual statement to the taxpayer outlining the outstanding tax. However, the annual statement is not considered a bill.

While the taxpayer is in not collectible status, the 10-year statute of limitations still applies within this context. However, if after 10 years the IRS still cannot collect the tax, then the tax debt will expire.

The IRS manual outlines procedures for how IRS professionals will report accounts currently not collectible. According to IRM 1.2.14.1.14, Policy Statements for the Collecting Process, an account can be removed from active inventory after the collection process (IRS.gov, “Part 5. Collecting Process, Chapter 16. IRS Currently Not Collectible, Section 1. IRS Currently Not Collectible,” 8/18/2013).

Taxpayers whose assets cannot be found are more likely to receive consideration for CNC. Essentially, if the IRS has no means of enforcing collection, then the taxpayer’s account will become not collectible.

[1] This is also known as transaction code 530.

PROS AND CONS OF IRS CURRENTLY NOT COLLECTIBLE STATUS

The pros and cons of receiving a currently not collectible status are specific to the taxpayer’s ability to pay taxes owed. If the taxpayer is unable to pay, then they will receive this consideration. If the taxpayer cannot pay the tax owed, and the IRS fails to collect the debt in 10 years, then the taxpayer will not have to pay the debt. However, there is a 10-year statute of limitations that the IRS can exercise in the event that the taxpayer is able to begin a payment structure.

It is important to note that CNC should not be considered as a permanent form of tax debt resolution. On the pro side, if you qualify for the status, “you will not face levies (which the IRS uses to garnish your wages or put a lock on your bank account until the taxes are paid). However, on the con side, you will still be subject to federal tax liens on your home or property …” (Hein).

If your property is sold, the money will go towards paying off your taxes, which means that you will more than likely have to pay IRS-imposed interest and penalties. Once the IRS grants you CNC status, you can expect the IRS to continue to review your financial situation to determine improvement and ability to pay taxes owed.

The IRS will periodically monitor your financial situation and review reports from third parties such as employers and banks. If the IRS determines that your income has increased, then you will no longer be eligible for currently non-collectible status. “However, this financial review does not apply if you are on a fixed income (e.g., disability, pension, Social Security, etc.)” (Hein). It is possible to remain in currently not collectible status until all of your tax liabilities expire.

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WHO IS ELIGIBLE FOR CURRENTLY NOT COLLECTIBLE STATUS?

Qualifying for CNC status is open to any taxpayer with IRS tax debt and who specifically cannot make monthly payments. All candidates for CNC must disclose their gross monthly income — what they bring in before taxes and other deductions.

Taxpayers must provide an outline of “allowable monthly expenses (expenses related to life, health, welfare, or the production of income)” (Hein). The IRS requires taxpayers to reveal their liquefiable assets to determine how much they can send the IRS today.

Lastly, taxpayers must calculate their total IRS back-tax liability. “If your allowable monthly expenses exceed your gross monthly income and your liquefiable assets are considerably less than your total IRS back-tax liability, you will likely qualify for Currently Not Collectible status” (Hein).

If a taxpayer’s income situation changes — especially considering that income significantly exceeds expenses — then it is likely the taxpayer will be removed from non collectible status and be expected to return to normal payment schedules.

HOW DO I OBTAIN CURRENTLY NOT COLLECTIBLE STATUS?

To obtain currently not collectible status, you will need to consider addressing your concerns with a tax attorney who is knowledgable in resolving IRS back-tax liability and who is competent to review your financial situation “for free to determine whether pursuing Currently Not Collectible status is worthwhile; if hired, he or she will also take care of the rest of this process” (Hein).

To obtain currently not collectible status, you may also contact the IRS directly and apply using Form 433-F, Collection Information Statement. When you contact the IRS, be sure to ask for an updated tax balance due which includes both interest and penalty amounts.

You need to know the balance due through to the current date. Lastly, you can also apply for currently not collectible status by filing some tax returns and beginning the application process. Keep all receipts as proof that you mailed your request to the IRS.

WHAT INFORMATION IS NEEDED TO REQUEST CURRENTLY NOT COLLECTIBLE STATUS?

To request CNC status, you must demonstrate an inability to pay the tax debt. You must show specifically that you cannot make monthly payments. With this in mind, you will need to gather specific information and different types of documents to prove your claim.

The following types of information are required to meet CNC eligibility requirements:

Copies of most recent paycheck stubs for each job, for the past month.

Copies of most recent statements of all monthly income[1] that you receive.

Copies of most recent real estate tax bill for all property[2] owned, even if owned with someone else.

Copies of utility bills, which include electricity, water and sewer, gas and phone.

Copies of lease or mortgage statement showing monthly rent or mortgage payment.

Copies of most recent statement for all credit cards.

Copies of most recently personal property tax bill for each car[3].

Proof of assets such as stocks, bonds, etc.

Proof of related monthly expenses specific to food and necessities, daycare, medical expenses, and court-ordered payments such as child support or spousal support.

If you are married, the IRS requires you to submit the information above for both parties.

[1] Proof of income here is specific to Social Security benefits, pension, or retirement income, child, or spousal support, and/or TANF.

[2] The IRS requires you to know the date you bought the property and how much you paid for it.

[3] You will need to know the mileage and monthly payment for each car owned.

IRS CURRENTLY NON-COLLECTIBLE STATUS

There are many ways to resolve a tax liability. You can set up a payment plan[1], attempt to settle a tax debt with an Offer in Compromise or pay the balance that you owe in full. However, there are some instances where any amount of money would create an unfair economic hardship on the taxpayer.

As a result, the IRS created a temporary hardship status known as IRS currently non-collectible status. This may be also referred to by the IRS or by tax practitioners as “CNC status” or 53ing an account (the code the IRS enters into the account to place it in IRS currently non-collectible status.

By placing an account in IRS currently non-collectible status, the IRS essentially halts all attempts at collection activity on an account until it feels that the taxpayer is ready to make payments again. IRS currently non-collectible status generally lasts anywhere from six months to over two years.

REQUIREMENTS FOR IRS CURRENTLY NON-COLLECTIBLE STATUS

In order for the IRS to deem that a taxpayer account is non-collectible, the taxpayer must demonstrate severe and apparent economic hardship.[2] The IRS will collect detailed financial information from the taxpayer, which is usually collected in the form of a financial statement (433-F[3] or 433-A[4]).

After analyzing the current financial information, including supporting documentation such as bank statements and verification of monthly expenses, the IRS will make a determination on the collectability of the account. If the account is deemed non-collectible, the IRS will remove it from its queue of active collection accounts.

If the account is deemed collectible, then the IRS will request payment terms based on its analysis of the taxpayer’s financial situation.

ADVANTAGES AND DISADVANTAGES OF IRS CURRENTLY NON-COLLECTIBLE STATUS

One of the major advantages of IRS currently non-collectible status is that the 10-year statute of limitations on collections, known as the CESD[5], continues to run on the account while the account has been deemed non-collectible. This means that the IRS has less time to try and collect from the taxpayer when they are finally deemed collectible.

This should be a major consideration for those who can barely afford to make small payments to the IRS every month. You may not be required to make any payments to the IRS until your financial hardship dissipates and you are that much closer to discharging the liability in full.

However, one key disadvantage of IRS currently non-collectible status is that it is only a temporary solution, generally lasting not more than two years. The taxpayer will be forced to reapply for IRS currently non-collectible status after they are deemed collectible again or set up an alternate payment arrangement with the IRS.

In addition, you can suddenly be tossed out of IRS non-collectible status with no warning and then will have to scramble for a resolution. Your financial status may not have changed since you were deemed non-collectible, but you will still need to resubmit financial information to get back to being considered non-collectible.

In conclusion, IRS currently non-collectible status is not for everyone. However, if you do qualify, it can provide much-needed temporary relief for your IRS collection issues. In order to find out if you qualify for non-collectible status, fill out a financial statement with an accurate picture of your monthly income and expenses.

If you want to discuss your eligibility for CNC status, call me. We have worked with many taxpayers to resolve their debt with the IRS. If CNC ends up not being the best solution for you, we will keep trying until we come up with the best repayment option. Place your trust in our attorneys who have solid experience in representing clients before the IRS — Brotman Law.

CONCLUSION

Having a levy against your bank accounts is bad news. You probably feel completely helpless and do not know where to turn. That is why I encourage you to reach out to me. I understand how the IRS works and know tactics that can help ease your situation.

However, do not wait. Once you receive that notice from the IRS, the clock starts ticking. If you can make a start on getting your situation resolved during those 21 days, there is a strong probability that the IRS will give you a break. What do you have to lose at this point?

[1] Here is information from the IRS regarding levies, including some information on a bank levy.

Chapters

What If I Cannot Pay the IRS? Currently Non-Collectible Status